Why the Fed Won't Drop Interest Rates: Tariffs & Inflation

The following is a transcription of the podcast episode. Listen Here.

Why the Fed Won't Drop Interest Rates (And Why That's Actually Smart)

This week, we are going to be talking about the flood of economic news that we've been hearing from the jobs report to the interest rate environment because it affects your wallet, your investments, your job, if you have one, and certainly it affects all of our futures. So let's dive in.

The Fed's Big Decision That's Making Everyone Anxious

Yesterday, the Federal Reserve made a very big decision and actually consumers are feeling pretty anxious about this decision. There's this feeling out there that everybody wants the Federal Reserve to drop interest rates. We want interest rates dropped back down to where they were during the pandemic.

I've said it before, I'll say it again—it's not going to happen. There's a couple of reasons for that. But the reason that he did not or they did not lower interest rates is because of what's actually going on in the economy.

Now, we need to remember that the economy is not the stock market and the stock market is not the economy, but they are kissing cousins.

The Real Reason: Tariff Uncertainty

Jay Powell, the Fed chairman, basically said the reason that they aren't dropping interest rates is right now, this moment, the uncertainty about tariffs. It's making the Fed nervous about inflation coming back.

Let's Do a Quick Review: Pandemic vs. Now

During the pandemic, the Fed dropped interest rates down to like practically zero. So you could refinance your house or buy a house or buy a car with your interest rate at around 3%. So that was the bank's markup. And it did that in order to stimulate spending and to get the economy moving again. That was the tool that the Fed had at its fingertips to keep our economy moving.

Now, the difference between then and now is dramatic. We had an economy in a pandemic on the near verge of collapse because America's economy is really driven by consumer spending, not by what we manufacture or produce.

When interest rates dropped, it meant a lot of things. It meant we bought houses, we bought cars, we refinanced, we did things. It was economic activity going, which fueled the economy. That was in 2020 and 2021.

Remember What Happened to Your Investments?

Do you remember what happened to your investments in '21 and '22? Do you remember how much money was made because Americans were spending so much money and companies were investing and people had jobs? There was just this flurry and flourishment that happened.

And in response to that, the Fed chair, Jay Powell, actually came in and said, "OK, the housing market is too hot. People are flipping homes way too quickly. We got to slow the sucker down. Inflation is way too high."

So he did exactly what he was supposed to do. He raised interest rates up to make borrowing more expensive in order to stabilize and slow down inflation.

The Pressure from the President

And the dude is getting a lot of pressure right now from the president to lower interest rates because the economy is doing so well. But that is not how this goes, people.

And that is why anytime you come talk to me about whether you should refinance your house or buy a new home or get a new car or do any of those things that are directly connected to interest rates right now, I'm telling you, yeah, don't hold your breath. They're not going to drop interest rates.

Why Dropping Rates Would Be Stupid Right Now

The reason interest rates are not going to drop, the reason he didn't drop them yesterday, despite pressure from the president, is because it would be stupid of him to do that.

Inflation is not under control. Knock, knock, knock. Remember us talking about all those tariffs? Well, those tariffs are still a thing that are just now starting to hit places that we shop.

And so the cost of goods that we buy is going up. And so what we spend money on, we are in a price increase market. That means that we're spending more for the same thing and getting less.

Think of a box of cereal, right? You spend $6 now for a box of cereal that's now half the size as it was five years ago. That's inflation explained really well.

Why Powell Made the Right Call

So in the face of interest rates being where they are, and the prices being where they are, and the uncertainty of the tariffs being what they are, there was no reason for him to drop interest rates to just provide some economic relief. In other words, making it easier to borrow money for either companies or people.

I stand behind what he decided to do, and if you are somebody that's really thinking about your future as far as interest rates, buying a house, buying a car, things like that, then I just want you to be prepared for the reality.

What he did yesterday made sense. If he had made any other move and dropped interest rates even a little bit, it would have signaled something entirely different to the economy, and I believe that we would have seen higher inflation than we're seeing today.

The Bottom Line

Don't hold your breath waiting for those pandemic-era interest rates to come back. The Fed is doing what it needs to do to keep inflation in check, even if it means disappointing everyone who wants cheaper borrowing costs.

That's a wrap. I'll talk to you next time.